How to go long

Laurence Terryn (pictured) is head of Long-Only Multi-Management at Candriam. Originally from Belgium, she is now well established in the Luxembourg fund industry, having been with the manager for more than two years and working in Luxembourg for more than 20 years.

A civil engineer with an applied mathematics degree, she now heads a five person strong long-only multi-management team which manages €360m in long-only fund of funds and a €3.5bn buylist of third party funds.

Given the current market volatility, it is certainly not an easy time to be a long-only investor. “I have to confess, I was a bit surprised with the way stock markets opened in 2016, large caps fell relatively less, small and mid-caps most, most fundamental European equity funds underperformed, while some funds with a defensive
strategy actually performed quite well,” she explains.

“On the balanced portfolios we had fairly good results. We removed all non-core bonds and the equities pocket (centered on Europe) performed in-line with the market. We added some European bond futures to reach a neutral duration vs the index, which really helped on market downside.

Overall, the bond pocket in our portfolio was outperforming the index as a whole.” “Now the situation is exactly the opposite. We are beginning to go back into European high yield. We tend to remove protection on long-term sovereign futures because we have to manage the medium-to-short term.”

OPEN-MINDED APPROACH
While short-term uncertainty is making it all the more important to invest in the right funds, it is important to startthe selection approach with an open mind.

“We do not have pure asset allocation deviations as our colleagues and the strategies we pursue are more focused on fund-picking, style and thematic perspective,” she says. “We don’t have a watch list but an incubation list besides our buylist. The latter is more long term with about 110 funds on stable consistent strategies. The incubation list is growing with about 80 specific style funds which are often smaller and sometimes more volatile,” explains Terryn.

Like most other selectors, Terryn and her team source funds initially through a Morningstar or Lipper database, with each asset class being reviewed on a rolling basis.
“Worldwide, there are now more funds than securities, so we’ve got plenty of choice.” Her selection process centres heavily on active managers. “In the fund of funds we manage, we have very few ETF’s, only some in emerging markets but they are not really a core part of our portfolio. Instead of index-based products, we might use futures at some point in order to enhance liquidity,” she explains.

QUALITATIVE SELECTION CRITERIA
Once a fund has passed the initial quantitative screening, Terry and her team apply qualitative selection criteria. “We don’t always travel ourselves to the fund manager’s
office, especially when we are just looking at relatively small investments, but the risk management team visits every asset manager we invest in, have a veto and validate every fund we select.”

Nevertheless, Terryn’s team usually arranges a call with the fund manager in order to discuss key aspects of the fund management process. “We try to follow the manager’s
market views and understand how they are reflected in the management of their fund. It is important that their investment strategy is consistent with their behaviour. For example, a structurally defensive fund shouldn’t be performing well in a rising market.

These inconsistencies are a reason for fund review and could be a reason for putting a fund on negative assessment or even removing it completely from the buy list (after an in-depth analysis).””

Returning to the volatility theme, Terryn suggests that one of the key challenges is to balance short term performance against the long-term investment outlook.

During the interview, in mid- February, Terryn expressed a constructive view on commodities. “Tactically, I think, yes, commodities could have a comeback, but in practice it is difficult to implement in the short term, with commodity indices still falling. We have had some stocks on gold in our balanced portfolio from which we benefited. We try to leave space for tactical thematic ideas. “The beginning of the year was such a risk off momentum,you cannot battle against the market too long; it is important not to miss the rebound,” she warns.

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